A Bold Dissenter at the Fed, Hoping His Doubts Are Wrong

RICHMOND, Va. — Jeffrey M. Lacker, the Federal Reserve’s most persistent internal critic, does not much resemble a firebrand. He is personally cheerful, professionally inclined to see both sides of an issue and quick to acknowledge he may not be right. He says he would rather be wrong.

But for the last several years, Mr. Lacker, president of the Federal Reserve Bank of Richmond, has warned repeatedly that the central bank’s extraordinary efforts to stimulate growth are ineffective and inappropriate and, worst of all, that the Fed is undermining its hard-won ability to control inflation.

Last year, Mr. Lacker cast the sole dissenting vote at each of the eight meetings of the Fed’s policy-making committee, only the third time in history a Fed official dissented so regularly.

“We’re at the limits of our understanding of how monetary policy affects the economy,” Mr. Lacker said in a recent interview in his office atop the bank’s skyscraper here. “Sometimes when you test the limits you find out where the limits are by breaking through and going too far.”

As the Fed enters the sixth year of its campaign to revitalize the economy, the debate between the Fed’s majority and Mr. Lacker — whose views are shared by others inside the central bank, as well as some outside observers — highlights the extent to which the Fed is operating in uncharted territory, making choices that have few precedents, unclear benefits and uncertain consequences.

The economy continues to muddle along, shadowed by the threat of another government breakdown, and the crisis of high unemployment is only slowly receding. But in trying to address those problems by suppressing interest rates, the Fed risks the unleashing of speculation and inflation.

It is basically a matter of disposition: is it better to risk doing too much, or not enough?

Mr. Lacker, 57, often uses the word “humility” in describing his views. He means that the Fed should recognize that its power to stimulate the economy is limited, both for technical reasons and because it should not encroach on the domain of elected officials by picking winners and losers.

As he sees it, the Fed’s current effort to reduce unemployment by purchasing mortgage-backed securities crossed both lines. He sees little evidence that it will help to create jobs. And he says that buying mortgage bonds is a form of fiscal policy, because it lowers interest rates for a particular kind of borrower.

But Mr. Lacker is at pains to emphasize that his disagreement with the other 11 members of the Federal Open Market Committee, who supported the purchases, is not about the need for help.

“It’s very unfair to think of me as not caring about the unemployed,” he said. “It just seems to me that there are real impediments, that just throwing money at the economy is unlikely to solve the problems that are keeping a 55-year-old furniture worker from finding a good competitive job.”

That sense of caution is deeply frustrating to proponents of the Fed’s recent efforts. The economists Christina D. Romer and David H. Romer wrote in a paper published last month that such pessimism about the power of monetary policy is “the most dangerous idea in Federal Reserve history.”

Photo

Jeffrey M. Lacker questions the Fed's tack.Credit
Steve Ruark for The New York Times

“The view that hubris can cause central bankers to do great harm clearly has an important element of truth,” wrote the Romers, both professors at the University of California, Berkeley. “But the hundred years of Federal Reserve history show that humility can also cause large harms.”

It also makes an interesting contrast with Mr. Lacker’s personality. His favorite escape is driving a Porsche Boxster racecar; a model sits on a shelf at his office. He jokes that the track is the only place that people don’t ask him about interest rates — although, he adds, they do care about fuel prices.

And at the Fed, an institution that likes consensus, dissenting also requires a certain amount of boldness. Mr. Lacker has now said no at 13 of the 24 regular policy meetings he has attended as a voting member, one-third of all dissents since Ben S. Bernanke became the Fed’s chairman in 2006. He voted in 2006, 2009 and 2012 as part of the regular rotation of reserve bank presidents.

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Even some who sympathize with his concerns doubt the efficacy of such public stands.

“The Fed is a club and dissenting puts you outside the club,” said Allen H. Meltzer, a professor of economics at Carnegie Mellon University who is a leading historian of the central bank. “You send the message to the public and that’s a good thing, but you also send a message inside the Fed and that’s not a good thing. You are isolating yourself.”

But Gary H. Stern, who served as president of the Federal Reserve Bank of Minneapolis from 1985 until 2009, said that the dissents were valuable.

“If you have a forceful and compelling rationale, I think that is constructive internally and externally,” Mr. Stern said. “I think the Fed obviously has been in my opinion dealt a difficult hand. To some extent the waters are uncharted. It would be in a way remarkable if you had unanimity under these circumstances and I think Jeff’s concerns about what the Fed can accomplish in this environment and what the risks on the inflation side may be, I think that those points need to be taken seriously.”

Mr. Lacker joined the Richmond Fed as an economist in 1989 after working as a professor at Purdue University. The regional reserve banks tend to gather like-minded economists, and Richmond has a long tradition of skepticism about monetary policy.

He became president in 2004, in an era of complacent satisfaction for central bankers, who took credit for a period of extraordinary economic stability that Mr. Bernanke and others called “The Great Moderation.” Mr. Lacker recalled that he regarded the major questions of monetary policy as settled.

“I thought we’d converged around a good healthy framework where the range of debate was going to be limited,” he said. “I was wrong about that.”

He continued to agree with Mr. Bernanke and the majority of the committee about some things. He dissented only once during 2009, otherwise voting with the majority in support of the Fed’s efforts to stimulate the economy by suppressing interest rates and buying Treasury securities. He also supports Mr. Bernanke’s efforts to increase transparency; he sees his own efforts to explain his dissents as part of the broader work of demystifying monetary policy.

Given the consequences if he’s right, does he ever worry that he’s not shouting loudly enough?

“I haven’t been running around like my hair’s on fire,” he said. “And I think for me that reflects some humility. I’m not absolutely certain that the risks I worry about are going to show up. The majority of the committee, and the course they’re on, they could be right.”

A version of this article appears in print on January 9, 2013, on Page B1 of the New York edition with the headline: A Bold Dissenter at the Fed, Hoping His Doubts Are Wrong. Order Reprints|Today's Paper|Subscribe